U.S. News & World Report
Consumer staples are good buys during periods of historic economic uncertainty.
Following another steep 75-basis-point hike from the Federal Reserve, stocks slumped to fresh lows in September, tumbling below prior support levels. Until there is some sign of inflation letting up, it seems the Fed will keep slamming the brakes on the already slowing economy. All told, analysts are expecting a weak holiday season, and it seems like this rough period could carry on into 2023. Some investors are selling everything and going to cash. But, historically, trying to time the market has been a difficult endeavor that can cause people to miss the big recovery once the tide turns. Rather, a more sound strategy is to hold defensive stocks to ride out the market storm. And few sectors are more reliable than consumer staples. Regardless of what the economy is doing, people are going to eat, drink and buy personal hygiene products. Here are seven consumer staples stocks to buy now.
McCormick & Co. Inc. (ticker: MKC)
McCormick is the world’s leading purveyor of spices. It also has extensive businesses in sauces, seasonings and flavors for food service operations. McCormick has a tremendous market position because of the nature of the spices and seasonings business. Products like black pepper, oregano and thyme are difficult to compete with. No one is going to roll out a new brand of oregano with different features. Plus, prices are low enough that people don’t tend to worry about the cost of any individual spice they buy. If people do pick the generic store spice brand, McCormick is a leading manufacturer of those, too. And there’s more than spices — McCormick is a leading provider of sauces and flavors to chain restaurants. Its acquisition of the French’s and Frank’s brands in recent years expanded McCormick’s reach into hot sauce and condiments. Long story short, consumers want more flavorful and interesting foods, and McCormick delivers.
Hormel is a Minnesota-based packaged-foods company primarily focused on proteins. The company is known for its Spam canned meat. Investors may assume Hormel is old-fashioned due to that. However, Spam actually makes up just a small fraction of Hormel’s overall revenue. What sets the company apart is its extensive line of proteins covering all demographics. The company made a huge move into turkey many years ago and is now the leader in that health-conscious meat. Hormel sells the majority of the country’s pepperoni and is a top player in bacon. Hormel’s portfolio also boasts plant-based meat alternatives. On top of that, Hormel has had dominant positions in guacamole, peanut butter, nut butters and Mexican salsas in recent years. Hormel stock never looks especially cheap — it now trades at about 22 times forward earnings — but it has grown its earnings and dividend at a 10% annualized rate over the long term. That’s a tremendous result in the food industry.
Hershey has proven to be a great defensive company for handling the current inflationary wave. Chocolate is a great product in that it is inexpensive, people love their favorite brands and competition is limited. Hershey and chief rival Mars Inc. control roughly two-thirds of the American chocolate market, keeping pricing pressure to a minimum. There’s also no traction for store-brand sweets, unlike most other food products where people will trade down during hard times. This privileged position has allowed Hershey to push through large price increases recently without hurting sales volumes. Hershey has also moved much of its manufacturing to Mexico, which has kept costs contained. Add it all up, and Hershey has doubled its earnings per share between 2017 and 2022. A defensive, recession-proof business with strong earnings growth is a perfect recipe for surviving current market conditions.
Like sweets, alcohol is also a recession-proof industry. People tend to drink both to celebrate the good times and to commiserate during the rough ones. Diageo is well known for brands including Johnnie Walker, Tanqueray, Smirnoff, Don Julio and Buchanan’s, along with Guinness beer. Diageo enjoyed a strong 2020 and 2021, with the stock doubling off its pandemic lows. Guinness beer has been outperforming compared to most other beers, while the company’s broad spirits portfolio has held up despite some weakness in individual markets. However, Diageo stock is now in a slump, in large part because the business is based in the United Kingdom and its home stock listing is in London. The British pound has plunged to multi-decade lows, taking British assets like Diageo with it. This has pushed Diageo to about 21 times forward earnings, which is a huge bargain compared to Diageo’s normal trading range.
Brown-Forman Corp. (BF.A, BF.B)
Brown-Forman is another leader in the spirits industry. The company is the longtime owner of the Jack Daniel’s whiskey brand, taking it from a small regional operation to a household name. In recent years, Brown-Forman has enjoyed tremendous success selling into emerging markets such as Mexico and South America that are quite hospitable to American whiskey. In addition, Brown-Forman shrewdly jumped on the tequila train in 2006, picking up brands Herradura and El Jimador for $776 million. Tequila would subsequently explode in popularity, making the company’s buy an absolute home run. The company’s overall operating results have been muted since 2020 as the pandemic closed down bars and European tariffs hit sales of American whiskey there. But results have turned the corner in 2022, and shares could be primed to move back toward their recent highs.
Clorox has had one of the wildest rides of any consumer staples company. Prior to March 2020, CLX stock was selling for about $160 per share. Shares spiked all the way up to $240 in the summer of 2020 as people hoarded cleaning goods. Since then, however, Clorox shares have plummeted. They hit $120 at the lows and are still around the $140 mark today, which is well below where Clorox was trading when the pandemic began. This is economics in action: Clorox enjoyed an initial sales boom but is now in an extended bust as the cleaning products market is saturated. Clorox was earning more than $6 per share before 2020. Earnings are slated to be just $4.07 this year, making the stock look expensive on today’s results. However, as profits return to normal, Clorox will return to a much more reasonable valuation. In the meantime, shares offer a solid 3.3% dividend yield.
Church & Dwight Co. Inc. (CHD)
Church & Dwight is a staples company that has rolled up a vast array of individual consumer products brands. C&D now sells everything from condoms to cat litter, deodorant to dental care products, and much more. The issue with Church & Dwight is that shares have historically been very expensive. People have paid a big premium for the company’s strong growth record, fueled by its seemingly endless stream of successful mergers and acquisitions. However, the chaotic 2022 market is hammering most highly valued stocks, Church & Dwight included. Shares have pulled back from a 52-week high of $105 to the $75 range today. Even so, shares are still going for 23 times forward earnings, which might not seem like a screaming bargain. However, C&D is a steady growth machine in the traditionally staid consumer staples industry, and as such, it could easily trade back above 30 times earnings once the current bear market relents.
7 best consumer staples stocks to buy:
— McCormick & Co. Inc. (MKC)
— Brown-Forman Corp. (BF.A, BF.B)
— Church & Dwight Co. Inc. (CHD)
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7 Best Consumer Staples Stocks to Buy originally appeared on usnews.com
Update 09/27/22: This story was published at an earlier date and has been updated with new information.
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